Chris Miller – Inside the Mechanics of Volatility Trading

Inside the Rapid Evolution of Systematic Option-Based Strategies

The world of systematic option-based strategies has changed more in the past decade than in the previous three combined. What was once a niche corner of quantitative investing has now become a highly dynamic, data-rich ecosystem, shaped by new market participants, new expiries, and new ways of expressing risk.

In this first part of a two-episode deep dive on Resonanz Spotlight, host Vincent Weber speaks with Chris Miller, Head of Equity Volatility and Derivatives Products at Goldman Sachs’ Systematic Trading Strategies (STS) Group, to explore how volatility trading has transformed—and what these shifts mean for investors globally.

Below is a cohesive narrative of the discussion.

A Market Reshaped by Structure and Participants

According to Miller, it’s hard to overstate just how dramatically the options market has evolved. Assumptions that held true even five or ten years ago now need to be reconsidered.

Two forces are responsible for the majority of this structural change:

1. The Explosion of Short-Dated Options

Where traders once relied primarily on monthly or quarterly expiries, they now operate in a world where major indices—such as the S&P 500—offer options expiring every single day. This shift began with Friday expiries, expanded to Monday and Wednesday listings, and eventually led to a full suite of daily (0DTE) options in 2022.

The result?
Investors have unprecedented precision. They can now isolate market expectations around specific events—earnings releases, macro announcements, policy decisions—with exact expiries tailored to the day of the event.

2. New Market Participants, Especially Retail and ETFs

Regulatory changes that allowed U.S. ETFs to more easily incorporate derivatives sparked a surge in derivatives-based products. At the same time, retail participation has climbed sharply. Together, these flows have meaningfully altered:

• Liquidity distribution
• Implied volatility behavior
• Strike-level and expiration-level flow patterns

This new ecosystem has brought more depth, more granularity, and more relative-value opportunities than ever before.

How the S&P 500 Volatility Surface Has Changed

Liquidity today is highly concentrated in near-the-money, short-dated options. That is not only because short-dated options naturally turn over more frequently, but also because they’ve become a preferred instrument for both institutional and retail investors.

Another major advancement is the availability of signed flow data. While the identity of counterparties remains unknown, data providers now classify flows by participant type—retail, institutional, bank, ETF, etc. This helps practitioners understand:

• Which parts of the surface attract retail buying
• Where institutional hedgers dominate
• How skew and wings are shaped by consistent, directional flows

These insights are foundational for the design of systematic strategies.

Zero-Day Options: Noise, Signal, or Something in Between?

Few topics have generated as much debate as 0DTE options. Miller emphasizes that while they are relatively new—only about three years in wide use—they are certainly here to stay.

Do they introduce noise? Of course. But they also unlock valuable use cases:

• Intraday convexity for tactical views
• More controlled risk profiles (e.g., buying short-dated calls instead of futures for upside exposure)
• High-frequency relative-value trades
• Carry strategies incorporating delta-hedging

Interestingly, early evidence shows the wings (deep OTM options) tend to display more dislocation, simply because fewer participants are willing to sell or warehouse that risk. Meanwhile, near-ATM pricing is more efficient due to the heavy and diverse flows that drive it.

Demystifying the Volatility Risk Premium

Volatility risk premium (VRP) has long played a central role in option-based strategies. However, Miller highlights a key nuance: even though terms like “variance risk premium” and “volatility risk premium” sound interchangeable, they can refer to subtly different concepts.

From a practitioner’s perspective:

• VRP, skew premium, and dispersion premium are empirically robust
• They are well-established building blocks in systematic strategies
• Implementation choices (pure exposure vs. hedged or vega-neutral variants) can differ depending on portfolio requirements

Investors continue to show interest in vega-neutral dispersion and skew-based systematic strategies, which often fit more cleanly into diversified multi-asset portfolios.

The Path Dependency Challenge—and How to Address It

One of the classic criticisms of volatility strategies is their path dependency. A simple illustration: someone buying a one-year at-the-money put only benefits if the market declines early in the life of that option. If markets trend upward for several months and then fall sharply, the hedge provides far less protection.

Modern systematic approaches address this by:

• Trading small, daily slices of long-dated exposures
• Building a continuous “ladder” of maturities rather than relying on single points
• Using granularity to reduce timing risk
• Designing portfolios that rebalance in real time

The increased availability of daily expiries has made this far more efficient than it was five or ten years ago.

Delta-Hedging in a World of Daily Expiries

When options expire monthly, delta-hedging daily is reasonable. With one-day options, the calculus changes entirely.

Miller explains two key developments:

1. Faster Hedging Infrastructure

Shorter expiries require faster hedging cycles. Hedging a 0DTE option once a day doesn’t make sense—it will have expired by the time the hedge is executed. Systematic strategies now rely on:

• Lower-latency systems
• More reactive hedging algorithms
• Controls to avoid over-hedging or “burning cash”

2. More Complex Intraday Modeling

Assumptions that once worked—like intraday volatility being stable—break down in the presence of zero-day expiries. Intraday volatility shows pronounced seasonality and event-driven behavior. This introduces:

• Modeling challenges
• Higher sensitivity to microstructure
• Greater dispersion of practitioner views

Even something as “simple” as calculating delta becomes non-trivial.

Managing Tail Risk Without Breaking the Strategy

Tail-risk hedging typically follows one of two paths:

A. Overlay Tail Hedges

Build carry strategies normally, then place an efficient tail-risk hedge on top. This is flexible but often requires bespoke solutions.

B. Embedded Protection Within Each Trade

A more intuitive approach is to structure trades as spreads rather than outright positions.
For example:

• Instead of selling a 15-delta put
• Sell a 15-delta put and buy a 1-delta put

This converts a pure short-put position into a short put-spread, embedding tail protection with minimal conceptual complexity.

Both approaches are increasingly common as investors seek return-enhancing strategies that remain resilient through stress scenarios.

Can You Time Volatility Strategies?

Market participants often ask whether they can time entries and exits in volatility trading. Miller’s view is balanced:

• Some timing signals add value, especially when implemented in a cost-aware, bottom-up manner.
• But improvements tend to be incremental—e.g., Sharpe moving from 1.0 to 1.2, not from 1.0 to 2.0.
• In relative-value strategies (like skew or dispersion), timing may matter more than in directional vol strategies.

The key is framing: naïve timing often disappoints, but systematic, constrained timing overlays can make strategies more efficient.

The Biggest Misconception About Systematic Volatility Strategies

Many assume that all systematic vol strategies simply short volatility. That’s a misconception.

The space includes:

• Convexity-seeking long-volatility trades
• Cost-efficient long-gamma overlays
• Vega-neutral dispersion
• Defensive option-based hedges
• Adaptive intraday convex strategies

Another myth is that volatility modeling is a solved problem. Miller notes that if you ask five specialists how to compute delta for a near-expiry option, you might get five different answers. The field is constantly evolving, especially as new expiries and flow dynamics reshape the landscape.